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Regions Financial says it is planning an increase in regulatory capital requirements and could administer new regulations for risk-weighted assets, but also said raising the capital threshold is unnecessary.
David Turner, chief financial officer of the bank with assets of $156 billion, told analysts Friday during the company’s second-quarter earnings presentation that Regions expected an increase in minimum effective capital standards and is preparing for a 6% risk-weighted asset requirement for banks with more than $100 billion in assets.
“Maybe there’s some customization,” Turner said, but based on a 6% threshold, Regions would need to raise $5 billion of “incremental” debt. The potential capital requirement would create a “total cost” to Regions of about $35 million or a “final hit” of 60 to 70 basis points, he said.
“It’s not something that’s easy enough to get past,” Turner told analysts. “We don’t think it’s necessary, but we can’t make the rules. We just have to adapt and overcome.”
The potential changes Turner was referring to could be part of a Federal Reserve proposal expected next week related to the final implementation of the Basel III international regulatory framework, also known as the end of Basel III. The Fed has scheduled an open meeting to discuss it on Thursday.
TO series of bank failures which began earlier this year with the Silicon Valley bank collapse in March has sparked a regulatory discussion led by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.
Policymakers and banking industry officials have debated back and forth over whether and by how much existing rules should be tightened to better isolate regional banks in particular of financial or economic shocks.
The key topics of debate have been around increase in certain capital requirements to include banks with assets of $100 billion or more And if the additional regulation increase the cost of capital in traditional banks and tilt market activity towards less regulated non-bank lenders.
The Birmingham, Alabama, bank will be able to “get through whatever we have to [meet]”if regulators enact new capital requirements, Turner said during Friday’s earnings call.
“We think the Fed is going to give us plenty of time to adjust to whatever those changes are without major disruption,” Turner said.
Regions was among the hardest-hit regional lenders amid sudden deposit sell-offs and other volatility that hit the industry earlier this year. At the end of the first quarter, Regions reported a 2.5% drop in deposits since the end of last year and a 9% drop since the first quarter of 2022.
The bank’s total deposits declined further in the second quarter, to $127 billion, but at a slower pace. Deposits as of June 30 were 1% lower than those of March 31 and 8% lower than those of mid-2022.
An analyst’s question to Regions about its exposure to office-related commercial real estate highlighted ongoing concerns about underlying risks that could be present throughout the banking industry.
The bank has a $1.7 billion office portfolio, consisting of “well-secured” single-tenant assets with 82% considered investment grade, Regions Chief Executive Officer John Turner told analysts.
He said the bank’s multi-tenant office assets are located primarily in the Sun Belt states and are “well diversified geographically.”
Regions reported net income of $581 million at the end of the second quarter, which was a 5% decrease from the first quarter and was flat compared to the same period last year. Net interest income fell 2.5% during the second quarter to $1.4 billion, but increased 25% compared to the same period a year earlier.
Non-interest income increased 8% to $576 million during the second quarter, but decreased 10% compared to the second quarter of 2022. Regions cited gains in its capital markets and credit card businesses that were offset by decreases in other categories including service fees on deposit accounts.